Do Loyalty Programs Work?
Everyone loves rewards – it’s a fact. When you graduated college, you wanted a diploma. When you made a big sale at work, you wanted a bonus. The psychology behind rewarding individuals for their appropriate input has been used as an incentive to motivate personal behavior for decades. Realizing the benefit of rewards, companies small and large have developed and implemented loyalty programs as a way to create value to motivate new or existing customers to try a product or service, as well as to encourage continuous purchasing with their brand. By having a strategy that is built to reward recurring engagement, loyalty programs can build customer retention, accelerate the customer life cycle, increase company profits and produce a variety of additional benefits for your business. That is, if done so correctly.
Designing and implementing successful reward programs requires a sustainable approach as part of a larger loyalty-management strategy. Studies show that the average consumer belongs to 14.8 loyalty programs but is only active in 6.7 of them.[1] So how do you create a loyalty program that captures and maximizes loyalty and profitability? Loyalty program success depends on good execution and ease of the customer experience. When building a loyalty program, companies must be able to communicate value with customers in proportion to the value the customers’ loyalty creates for the business. This requires an understanding of your customers, their needs, what factors drive their purchasing behaviors, and what influences inspire them to come back to buy again.
When designing loyalty programs, many companies fall short by only focusing on rewards that bring in and benefit new customers. Sure, you should always want to continue building your customer base, but your primary focus should be built on catering to your most profitable customers, not serving your less attractive base of customers. Short-term promotional giveaways or specials of the month are a great way to call attention to your business and attract new customers but will this necessarily achieve sustained loyalty? Your program’s goals should aspire to create success in the long-term, which starts by giving your best value to your best customers. Don’t waste resources by over-satisfying less profitable customers while under-satisfying the more valuable ones. Customers who generate the most for your company should be enjoying benefits of that value creation, and in turn will become more loyal and more profitable. By targeting and rewarding existing, valuable customers, you strengthen their personal relationship with your brand, encourage repeat purchases, influence more customer referrals, and build a loyalty program that becomes more profitable over time.
Achieving and maintaining a successful loyalty program requires you to measure your results along the way and course correct when needed. A loyalty program should not give something for nothing. It can be difficult to measure the full effect of these programs on customers’ behaviors by quantifiable results, and as such, you should be analyzing other factors besides just your sign-up numbers alone. The success of a loyalty program should be linked to rewarding, and thus reinforcing desired behavior, which can be made clear through tracking retention, redemption rate, purchase of new products, and acquisition of new customers. Only once you understand the relationship between these relationships and your offering can you create loyalty programs that encourage profitable customer habits.
[1] https://cdn2.hubspot.net/hubfs/352767/TLR%202019/Bond_US%20TLR19%20Exec%20Summary%20Launch%20Edition.pdf
